ISRAEL: Tax Issues Cause for Concern After Tamar Gas Starts Pumping

Bottom Line: Riding high on its massive Levant Basin discoveries and with the first gas coming online from one of these supergiant fields, Israel is considering raising taxes on its natural resources in a move that could harm existing investment.

Analysis: Enough gas has been discovered in Israel's Levant Basin to supply the country for 150 years and make it a key exporter. On 30 March, the first gas started pumping from the smaller of Israel's two supergiant fields, Tamar. Already in 2010 when the discoveries were made, Israel reset its tax and royalty rates. But last week, there were hints of more of this to come now that Tamar has begun producing. Israel's new Finance Minister Yair Lapid has said that the government is considering another new tax structure through the creation of a public panel on the issue. This announcement has sparked an angry backlash particularly from Houston-based Noble Energy Inc. (NBL), a key stakeholder in both Israel's supergiant fields, Leviathan and Tamar. Noble's CEO Charles Davidson has threatened to reconsider the company's investment in Israel if taxes are raised again.

Recommendation: It is important to keep in mind that this is the traditional immediate reaction of any government where there have been recent discoveries and new production has come on line. In Israel's case, because taxes were already raised with the discoveries in 2010, another tax hike because Tamar has begun producing is premature and damaging to the investment climate. Investors are particularly worried about any attempt to apply retroactive taxes. It is also important to understand that none of this is official and that the tax issue has not been reopened formally. Right now, it's just a rumor and most likely the government's attempt to test the waters with its biggest investors on the issue. Expect more "testing of the waters" on this issue, but also look for an Israeli decision on exports before the end of the year, keeping in mind that the country does not have an export policy yet and there is considerable division on this issue in terms of the amount of exports that should be allowed. Noble Energy hangs in the balance on these two issues, both of which could stymie its current market prowess and its stock price, which has soared since the Levant discoveries and the launch of Tamar production.